Real Estate - Market Time Report for 12/14

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Market Time Report: A Holiday Pause

December 14, 2006

Good Afternoon!

As Santa’s reindeers pause, so does the Orange County real estate market. The cyclical, holiday trend of more and more homes being pulled off the market as demand eases continues. In the last two weeks alone, the active inventory has declined by 911 homes, dropping to 12,661 homes. Over the past four weeks, the decline has been 1,504 homes. As we move deeper into the holidays, tired sellers longing to enjoy their lives without worrying about the sale of their home are throwing in the towel for now. Demand, the number of homes placed into escrow within the prior 30 days, dropped another 76 homes over the past two weeks (a 148 home drop over 4 weeks), dipping to 1,839 homes. The trend of homes coming off the market as demand falls should continue through the end of the year. With many sellers recognizing the weakness in the Fall and Holiday market and opting to forego the lengthy process by pulling their homes off the market, the active inventory has discarded 3,345 homes since reaching its 2006 peak of 16,006 homes at the end of August. Orange County’s market time dropped slightly over the past two weeks from 7.09 months to 6.88 months. Even though demand dropped a little, the market time descent can be attributed to the giant drop in the active inventory.

The gap between the detached home market and the condominium market remains considerable. The market time for detached homes has continued its descent, dropping from 6.87 months four weeks ago to 6.37 months today. For condominiums, the market time has bounced back and forth, from 7.53 months four weeks ago to 8.0 months two weeks ago to 7.77 months today. The difference in markets can be attributed in part to the larger percentage of vacant condominiums actively on the market. Homeowners who are marketing vacant homes are less inclined to pull their home off the market for the holidays. For detached homes, all ranges below $750,000 are at equilibrium or are a slight sellers market, at about a 5 month inventory or less. That range accounts for 46% of all homes on the market. The $1.0 million to $1.5 million market could be characterized as a sluggish buyers market. For detached homes above $1.5 million, 17% of the overall detached market, the inventory is at or above 10 months, very sluggish. For condominiums, the overall market is sluggish, hovering around the 7 month mark for all attached homes below $750,000, 83% of the market. For condominiums above $750,000, the market is almost at a standstill with inventories above 15 months. 29.4% of all active homes on the market are vacant. For detached homes, the number of active vacant homes climbed slightly from 25.4% to 25.6%. The number of active, vacant condominiums on the market climbed from 34.4% to 35%. Many vacant homeowners have their homes for sale and for lease so that they increase their odds of covering their monthly payments.

A year ago, the active inventory was at 7,759 homes, 4,862 fewer homes than today. The number of homes placed into escrow within the prior 30 days was at 2,175 homes, one year ago, only 336 additional escrows compared to today. The market time last year at this time was at 3.59 months.

What can we expect for the last couple of weeks of 2006 and the beginning of 2007? As mentioned earlier, more sellers will opt to pull their homes off the market so that they can enjoy the holidays and skip the slowest time of the year, from now through mid-January. Many buyers will step onto the sidelines as well and enjoy the holidays rather than admiring the holiday decorations of so many hopeful sellers who remain on the market. Demand will continue to fall through mid-January. BUT, the active inventory will actually start to rise just days after we toast to a New Year. The market cyclically does not start to rev its massive engine until the Super Bowl. The Super Bowl actually marks the beginning of the Spring market. At the beginning of this year, we started with 7,799 active homes on the market, 4,862 fewer than today. In the next couple of weeks, we are NOT going to be shedding enough homes. We will most likely start the year with about 12,000 homes on the market. At the beginning of this year, there were 2,175 homes placed into escrow within the prior 30 days, just 336 additional escrows compared to today. We will most likely start the New Year with around 1700 homes placed into escrow within the prior 30 days. With an inventory of 12,000 homes and demand at 1,700, the market time will be at 7.06 months, similar to today. The Spring market is a bit concerning. According to agents, too many homeowners are counting on the Spring market to sell their homes. This year, thousands of sellers have thrown in the towel, unable to achieve their goal in selling. Many of these sellers are planning on returning to the market to tap into the Spring activity. There will also be many new sellers who did not even attempt to sell their homes in 2006 who will be counting on the Spring as well. In starting 2007 with an active inventory already at 12,000 homes and demand that will most likely be similar to 2006 demand, the active inventory has the potential to rise to 16,000 homes during the Spring market and 20,000 homes during the Summer market. For the most part, demand in 2007 is shaping up to be a mirror image of demand in 2006. The height of demand for 2006 was achieved in April with slightly less than 3,000 homes placed into escrow within the prior 30 days. With the potential for 16,000 homes on the market in the Spring and demand of 3,000 homes, representing an inventory of 5.33 months, a market at equilibrium. With a rash of optimistic sellers hitting the market, the standoff between reluctant buyers to purchase and reluctant sellers to reduce their asking prices will continue through the first half of 2007.

How should a seller approach the market? To be successful, sellers need to approach the market with the conviction to price their homes according to the market value with the knowledge that it may take a while. Market value can be established by carefully scrutinizing recent sales, preferably the prior 90 days, all escrow activity and aggressive active listings priced below recent sales and escrows. This is not the market to attempt to go for a neighborhood record. That market ended in 2005. Sellers must be motivated to sell. Given the most recent snapshot of demand, 1,839 homes placed into escrow within the prior 30 days, 10,822 sellers will not be successful over the course of the next month. That figure alone is motivating to establish the appropriate list price. Sellers who are NOT motivated to sell their homes should pull their homes off the market and keep their homes off in the Spring. Unmotivated, overpriced sellers really do nothing but hurt the market by slowing it further. Sellers also must be willing to keep their homes in showing condition for months now. That means boxing clutter and storing it in the garage. The more a home resembles a model home when shown, the better the odds are of selling. Model homes are in great condition, all the lights are on, soft music is playing in the background and the home smells great with a hint of vanilla cookies in the background. If possible, sellers should address cosmetic fixes that make a difference in net value, where every $1 spent increases the value by more than the $1. These fixes include replacing worn and soiled carpet, repainting the exterior and/or interior, replacing cracked toilets and sinks, repairing or replacing a leaking roof, etc. Basically, sellers should address items in the home that buyers overvalue the cost to repair or replace. Sellers should be willing to reevaluate their price from time to time as well. Many sellers wait too long to reevaluate and by the time they make the recommended adjustment, prices have eased further. Sellers want to avoid chasing the market down in price by keeping in constant tune with their local marketplace. How should a Buyer approach the market? The best time of year to be a buyer is now through the Super
Bowl. The sellers that remain on the market are typically very motivated. This will of course change with the unrealistic expectations of the coming Spring. Buyers should attempt to negotiate with serious home sellers. Most fit that bill right now. So, it is imperative to attempt to establish why a seller is selling and their desired timing to make their move. Many sellers are leaving the area because of job transfers or a desire to live close to relatives or there is some underlying hardship. Rather than conjuring up a ridiculous offer, buyers should carefully consider the market value by taking into consideration recent sales (prior 90 days) and all escrow activity. The act of negotiating is often referred to as an art. Buyers must be careful not to insult a seller and remember that they are offering to purchase somebody’s home. Buyers should back up their offers with data. Currently, even though interest rates have increased slightly over the past week, rates are very low. Bernanke and the Federal Reserve are hesitant to do anything with rates because they are trying to balance the pressures of inflation with a potential recession. Look for rates to seesaw up and down for the near term. Buyers should know that purchasing a home in sunny Southern California has always been an excellent historical long term investment. Buyers should establish a payment that is comfortable for their family budget and purchase according their comfort level. BUYERS BEWARE: do NOT attempt to time the “bottom” of the real estate market. Economic experts are unable to forecast the true bottom of a market. Instead, buyers that sit on the sidelines often let opportunity pass them by. The following areas have inventories of six months or less: Aliso Viejo, Cypress, Dove Canyon, Foothill Ranch, Fountain Valley, Fullerton, Huntington Beach, Lake Forest, Mission Viejo, Placentia, Portola Hills, Rancho Santa Margarita, Villa Park and the range of homes between $500,000 and $750,000.

The following areas have inventories between nine and ten months: Brea, Corona Del Mar, Costa Mesa, Laguna Woods, San Clemente, San Juan, Santa Ana and the range of homes between $1 million and $1.5 million.